We examine how the evidence of mean-reversion in stock returns affects dynamic trading behavior for investors with prospect-theory preferences. Particular attention is paid to the trading incentives created by the interaction between prospect-theory preferences and mean-reverting return...

The past several decades have witnessed a growing enthusiasm to implement the market as an information aggregation tool. However, some deep-rooted pricing anomalies frequently observed in various markets loom large, questioning the rationality of such eagerness. One of these anomalies is the...

In this paper, we investigate a novel multiperiod portfolio decision model for loss-averse investors with dynamically adapted reference points in a market with serially correlated returns. We demonstrate that the optimal policy is a piecewise linear function of the deviation between current...

Reference dependence, loss aversion, and risk seeking for losses together comprise the preference-based component of prospect theory that sets its value function apart from the standard risk-aversion model. Using an elasticity analysis, we show that this distinctive preference component serves...